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In Accounting Today’s article “Properly Classifying Workers Remains a Major Problem“, employment attorney Scott Connolly comments on how worker misclassification is a prevalent issues for both the Internal Revenue Service and state taxing officials. Companies that misclassify employees as independent contractors avoid paying minimum wage, payroll taxes, overtime, worker’s compensation, and other payments under the Federal Family and Medical Leave Act. However, this mislabeling can lead to trouble with the IRS, including the company owing taxes it failed to withhold by classifying a worker as an independent contractor instead of as an employee.

Additionally, as Scott notes:

The employer should be concerned about misclassification claims from the workers themselves… Many service providers want to be classified as independent contractors, but companies run the risk because later there might be disharmony in the relationship.”

Read the full article for more information on the potential consequences of misclassifying workers, or contact Scott Connolly for more information.

Government efforts to combat the independent contractor misclassification continue as a new U.S. Senate bill was recently introduced by Sen. Bob Casey of Pennsylvania. The “Payroll Fraud Prevention Act” would amend the federal Fair Labor Standards Act to require employers to “accurately classify” workers as either employees or non-employees, and to provide each worker with a written notice informing the worker “of the classification of such individual … as an employee or a non-employee.” The Act also would require the notice to include a statement directing the worker to a U.S. Department of Labor website providing further information about employee rights.

Under the Act, if an employer failed to provide the required notice to a worker the individual would be presumed to be an employee, as opposed to an independent contractor. The Act also would contain anti-retaliation protections for workers and would amend the Social Security Act to provide for audits of employers who are believed to be misclassifying workers for purposes of avoiding unemployment taxes or benefits.